3.2 Introduction

This case contains 12 finance challenges ranging from formatting and entering data in simplified financial statement to valuation of stocks, bonds, and firms.

This case contains the following challenges:

  • Completing Financial Statements: This challenge has the student create a simplified version of the three main financial statements: the income statement, balance sheet, and statement of cash flows.

  • Financial Ratios: This challenge will practice worksheet formatting and calculate ratios for Noah’s Auto Repair. Both the income statement and the balance sheet of the company for the last five years are given.

  • Financial Forecasting: This challenge practices financial forecasting using the percent of sales method for the Yellow Bus company.

  • Time Value of Money: This challenge runs through several scenarios to assess the feasibility of how much to save for 10 years to reach a target goal and saving to pay for college in 18 years.

  • Bond Valuation: This challenge starts by charting the Treasury Yield curve. The next set of tasks examine the bond price sensitivity with the change in yield to maturity. Finally, the challenge will examine the relationship between YTM and the bond price for discount, par, and premium bonds.

  • Stock Valuation: The first set of tasks will help build a basic understnding of stock valuation equations. The next set of tasks calculate the value of a stock that will start paying a dividend. Finally, the tasks will value a stock that just paid a dividend.

  • Risk and Return: The first set of tasks calculate the expected returns based on the past stock price information, standard deviations of the returns, and betas of each stock. After completing the calculation the student will graph a security market line, which is a graphical representation of risk and return. The next set of tasks will create a portfolio of two stocks. Solver is used to find the optimal portfolio.

  • Cost of Capital: In this challenge on cost of capital, students will see how the marginal cost of capital changes based on the amount of capital a firm needs to raise. Generally, the higher capital requirement for a project, the higher cost of capital for the project. Students will calculate cost of debt, preferred stock, and common stocks first, then calculate the breakpoints of the cost of capital and graph the marginal cost of capital curve.

  • Leverage: In this challenge, students will analyze both operational and financial leverage to understand their effect on the company's earnings.

  • Capital Budgeting Criteria: This challenge has three scenarios:

    1. Comparing three projects using NPV, IRR, PI, and EAA.

    2. Comparing three different projects and answering questions about what the calculated values represent.

    3. Comparing three project cash flows. Examine the NPV relationship between Projects A and B first, and then examine how the internal rate of return is affected by having multiple sign changes in the cash flows.

  • Captial Budgeting: This challenge will analyze a new project that will be used to replace an old one. The company wants to conduct capital budgeting for the five-year project.

  • Firm Valuation Criteria: This challenge will calculate the firm value of Noah’s Auto Repair and its competitor, Yoshi’s AutoCare, using both the DCF method and the EBITDA multiple approach.

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